The question “What is Unrelated Business income “ is confusing to a lot of churches. According the IRS URBI is defined as an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:
- It is a trade or business,
- It is regularly carried on, and
- It is not substantially related to furthering the exempt purpose of the organization.
- Publication 598, Tax on Unrelated Business Income of Exempt Organizations
- Exempt Organizations Continuing Professional Education Text article (1999)
- Was the income derived from a trade or business? “Trade or business” is broadly defined as “any activity that generates income from the sale of goods or providing of services.” Nearly any income a ministry might collect (other than true donations) could qualify as “trade or business” income.
- Is the organization regularly engaged in the trade or business? A court would compare a ministry’s involvement to the amount of time commercial businesses spend in the same type of activity. For example, a church that leases spaces in its parking lot—even one day per week all year long—is considered to “regularly engage in” the trade or business of commercial parking. Weekly coffeehouses also might meet this requirement.
- Is the activity unrelated to the organization’s exempt purpose? This is the BIG ONE To be tax-free, an activity must be “substantially related” to the church’s exempt purpose. This question has been heavily litigated and can be the most difficult to answer. Just because money earned from business activities supports an exempt purpose doesn’t make the activities tax-exempt. A ministry must demonstrate that the activities further a purpose for which the organization is exempt, such as evangelism. While a ministry might see a coffee shop or fitness center as promoting fellowship or outreach, the IRS may see those activities as unrelated business operations. This would probably be even more likely if the church displays huge signs throughout town to promote its bookstore or coffee shop.